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Do children get a step up in basis when they inherit a house in California?
Yes, under current federal law. When a parent dies, the house's tax basis resets to its market value on the date of death, so the children only owe capital gains tax on growth after that day. Sell soon after and there is often little or no gain. The step up is lost if the house was signed over to the kids while the parent was alive.
Your children inherit the house at today's value, not at what you paid.
Capital gains tax is charged on the gain: the sale price minus your basis, which is roughly what you paid plus improvements. Under current federal law, when someone dies, the basis of what they owned resets to its market value on the date of death. That reset is the step up.
So the growth during your lifetime is never taxed as a capital gain. Your children start from the value on the day you die. Inherited property also counts as held long term automatically, even if they sell it a month later.
Quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor, not a fiduciary, and not a tax adviser. This is general education, not advice about your situation.
A house bought for 150,000 can pass with no taxable gain at all.
Illustrative arithmetic, not a tax estimate. A mother bought a Sunnyvale house in 1985 for 150,000. She owns it alone and it is worth 1,800,000 when she dies. Her two children inherit it.
If they sell a few months later for 1,800,000, the gain is zero. After the agent's commission and closing costs, the sale usually shows a small loss on paper.
If they hold it and sell ten years later for 2,400,000, they are taxed on 600,000, not on 2,250,000. The 40 years of growth before her death never shows up on anyone's return.
If she was married and her husband died first, the house may already have gotten a full step up at his death, which our page on the spouse step up covers. Her children get another one at hers.
Signing the house over to your kids while you are alive can cost them the step up.
This is the expensive mistake, and it usually comes from good intentions. A parent deeds the house to the children to avoid probate or to keep it out of a nursing home's reach.
A gift does not get a step up. The children take the parent's old basis. Run the same house again: deeded to the kids in 2015, sold after the mother dies for 1,800,000. Their basis is about 150,000, so the gain is about 1,650,000. They never lived there, so the home sale exclusion does not help them. Between federal and California tax, that bill can run well into the hundreds of thousands.
Adding a child to the title as a co owner is a messier version of the same problem. An ordinary revocable living trust is different. The house still counts as the parent's at death, so it still steps up. Some irrevocable trusts do not. If anyone suggests changing the title, ask what it does to the basis first.
The step up fixes the income tax. Prop 19 can still raise the property tax.
California's property tax is a separate system. Under Prop 13, the mother in our example may be paying tax on an assessed value near 340,000, even though the house is worth 1,800,000.
Since February 2021, Prop 19 limits how much of that low assessment children can keep. To keep it at all, a child generally has to make the house their own main home within a year and file for the homeowners' exemption. Even then, value above the old assessment plus roughly 1,000,000, adjusted for inflation every two years, gets reassessed.
If the kids rent it out instead, it is reassessed at full market value. On this house, at roughly one percent plus local charges, that can mean going from about 4,000 a year to about 20,000. That number often decides whether the family keeps the house or sells it.
Get the date of death value on paper before anyone sells.
The step up is only as good as the number you can prove. For a house, that means an appraisal as of the date of death. An appraiser can do one after the fact, but it is easier while the house still looks the way it did.
Keep the appraisal with the estate records. A child who keeps the house for 15 years will need that number when they sell, and the people who remember it may be gone by then.
Two more things people get wrong. California has no estate tax and no inheritance tax of its own. And if a child moves in and later sells, the home sale exclusion only counts the years they lived there, not the years the parent did.
If the kids sell soon after, there is often nothing left to defer.
There are structures that can change the tax on a sale of appreciated property. We are not going to list them, because which ones fit depends on facts only you have. For a house sold a few months after a death, the honest answer is usually that the step up already did the work.
Where it matters is the house that gets kept and grows for years, or a house that was gifted early and never stepped up. Those are worth a real conversation before a sale, not after.
One more thing about incentives. We are paid when a client ends up in a product we offer. Nobody is paid when the answer is that the step up took care of it. Weigh anything anyone tells you with that in mind, us included.
Before you decide
Questions worth asking.
Is the house titled in my name alone, in a living trust, or with someone else on the deed, and does that title keep the step up?
If I signed the house over to my children now, what basis would they get, and what would that cost them when they sell?
If my kids keep the house as a rental, what would the property tax be after Prop 19 reassesses it?
Who will order a date of death appraisal, and where will it be kept?
If my children sell within a year of my death, is there any gain left to plan around at all?
If you are recommending I retitle, gift, or sell anything now, what step up would it give up, and how are you paid on it?
Related
Do you pay capital gains tax on an inherited house in California?
Only on growth after the date of death. The basis resets to market value on the day the owner died, so a house sold soon after inheriting it usually shows little or no gain once selling costs come off.
Does a gifted house get a step up in basis?
No. A house given away during life keeps the giver's old basis. Only a house the owner still owns at death, including one in an ordinary revocable living trust, gets the step up.
Does a house in a living trust get a step up in basis?
Generally yes, if it is an ordinary revocable living trust, because the house still counts as the owner's at death. Some irrevocable trusts do not get a step up.
Does Prop 19 affect inherited houses in California?
Yes, for property tax. Since February 2021, children keep a parent's low assessment only if a child makes the house their main home within a year, and only up to the old assessment plus roughly 1,000,000, adjusted for inflation. A rental is reassessed at full market value.
Does California have an inheritance tax?
No. California has no estate tax and no inheritance tax of its own. The federal estate tax applies only to very large estates.
Where this fits.
This question sits inside a bigger one. Tax Deferred Strategies walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.